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5 Abstract 1 Abstract This study discusses dynamic development of Korean innovation system in a brief. The motivation of this paper is to improve understanding of the national innovation system, by investigating the Korean innovation system, from the start of capacity building, in consideration of theory of national innovation system. It is frequently pointed out that modern innovation policy is difficult to be implemented by the developing country, perhaps because of insufficient framework condition, or social capital. If the national innovation system can be taken as continuity from the capacity building, the policy domain would be expanded. If so, the policy can be pursued not only focusing on interaction of the innovation units and flows of knowledge, but also on the process of capacity building. In this line, we look into the historical evolution of the Korean innovation system. It is the development of Korean innovation system because it had taken only about four decades to develop an advanced system. In addition, the development of Korean system is initiated and driven by the government, and therefore the role of government is discussed which would provide some important implications to the developing countries. Double-winged strategy of Korean government was critical; such as promotion of industrialization on demand-pull side, and S&T development on S&T push side by creating GRI system.

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7 CONTENTS Abstract 1 Chapter 1. Introduction 7 Chapter 2. Evolution of Korean Innovation System Theoretical Approach Dynamic Structure of Korean Innovation System 13 Chapter 3. Industrial Policy and Industrialization Change of Industrial Structure Industrial Policy and Industrialization 23 Chapter 4. S&T Policy and Advancement of Korean Innovation System Trends of R&D Investment and HRST S&T Policy and Build-Up of STI Capacity HRST Policy 34 Chapter 5. Conclusion 39 References 41

8 List of Tables <Table 1> Major Economic indicators 21 <Table 2> Major R&D Indicators 27

9 List of Figures [Figure 1] STI Capacity Building 12 [Figure 2] Dynamic Structure of Korean Innovation System 12 [Figure 3] Incubation Stage (1962~1979) 14 [Figure 4] Expansion Stage (1980~1999) 16 [Figure 5] Mature Stage (after 2000) 18 [Figure 6] World top 30 Exports in [Figure 7] World top 30 Exports in [Figure 8] Korea s Top 30 Exports in 1975 and

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11 Chapter 1. Introduction 7 Chapter 1 Introduction The Korean War ended in 1953, and thereby Korea had almost no capacity both in the industrial and technological sectors. Economic development had to start from the bottom, with almost no endowment, but people. Korean government had implemented the first five-year economic development in 1962 and since then 7 times up until the middle of 1990s. Through the time period of those plans, the Korean economy has risen to, now, an advanced level from one of the poorest in the world. There would be many factors to influence the economic development of Korea. However, without science, technology and innovation (STI) development, such performance of the Korean economy would be impossible. In the course of economic development, the role of the government had particularly been critical to initiate and build up the national capacity in almost all sectors of the economy. The theory of innovation and/or national innovation system has been developed in the advanced country, whose STI capacity is well developed to greater extent. This is the reason that most studies about national innovation system place a focus on interaction, flows of knowledge, learning, public-private partnership, networking and cluster, etc., 1) In other words, the theory of national innovation system deals, given the national innovation system, with dynamism within the system, but not development process over time from the birth. Thus, it is frequently pointed out that modern innovation policy is difficult to be implemented by the developing country, perhaps because of insufficient framework condition, or social capital in comparison with that of the advanced country. If the national innovation system can be taken as continuity from the capacity building, the policy domain would be expanded. If so, the policy can be pursued not only focusing on interaction of the innovation units and flows of knowledge, but also on the process of capacity building. Therefore, it would be interesting to investigate the dynamic structure of the Korean innovation system along with the course of economic development. Korea s dynamic structure of the national innovation system is very different from those of advanced countries. In general, the potential and/or the efficiency of the national innovation system may depend primarily on the STI capacities of the innovation units within the system, such as firms, research institutes and universities, and then interactions at full capacity. The STI capacity in the advanced country has been built up over hundreds of 1) For example, see OECD (1997).

12 8 Korea's Strategy for Development of STI Capacity : A Historical Perspective years. However, it has taken only about four decades that Korean innovation system is developed from the start of building STI capacity, which makes very interesting case for the study of national innovation system. In the process of development of Korean innovation system, two factors such as S&T push and demand-pull factors must be considered. S&T push can be made by strategic development of S&T, while industrialization increases needs for science, technology and innovation. It is pointed out that both industrialization and S&T development were initiated and driven by the government policy. The purpose of this paper is to review historical evolution of Korean innovation system in consideration of theory of national innovation system. A discussion will be made about how Korea builds up STI capacity and sets up the national innovation system, and what kind of strategic approaches the government employed in so doing. The difference of Korea s innovation system from that of the advanced country will be pointed out. In this line, an emphasis will be placed on the role of the government. Chapter 1 includes a brief introduction, background and motivation of the paper. Chapter 2 will discuss the concept and dynamic structure of the Korean innovation system, and in this line some important government policy will be reviewed in chapter 3 and 4, i.e., industrial policy, S&T policy, and HRST policy, which are critical to build up STI capacity in Korea. Finally, concluding remarks will be made in chapter 5.

13 Chapter 2. Evolution of Korean Innovation System 9 Chapter 2 Evolution of Korean Innovation System 2.1. Theoretical Approach Conventionally, technological innovation is defined as the process through which new (or improved) technologies are developed and brought into practical use. In theory, innovation today takes place when scientific knowledge or opportunity meets the social and/or industrial needs. The theory has shifted its focus, in explaining the process of innovation, from the linear and non-linear models to complex ones. Nowadays, innovation takes place increasingly in a complex way. Most indicators regarding innovation are still collected based on the linear model, but the linear model has a limitation to explain innovation process. A better understanding of innovation has been possible when the concept of the national innovation system had been introduced in late 1980s. 2) The system-wide approach is not new, 3) but the conceptual framework of the national innovation system enriches the insight into innovation. The system approach basically has a root in the institutional school. This is why most studies about the national innovation system deals with the system itself, not with the potential or efficiency of the system. 4) That is, more important for the analysis are the process of innovation, interaction of the innovation units, flows of knowledge and learning. The definitions of the national innovation system are made in various studies. For example (OECD 1994), the national innovation system is The network of institutions in the public- and private-sectors whose activities and interactions initiate, import, modify and diffuse new technologies (Freeman 1987); The elements and relationships which interact in the production, diffusion and use of new, and economically useful knowledge and are either located within or rooted inside the borders of a nation state (Lundvall 1992); The national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change generating activities) in a country (Patel & Pavitt 1994); and The set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework 2) For example, see Freeman (1987). 3) Freeman (1995) pointed out that the idea of the national innovation system goes back to Friedrich List (1841) which provided the concept about the national system of political economy, Godin (2009) argues that the system approach in regard to the national innovation system used to be fundamental to OECD, which might have an influence on the scholars who provided the conceptual framework of the national innovation system in late 1980s and early 1990s. 4) In other words, those studies do not specify the system with an objective function, maximization or minimization and therefore no analysis of equilibrium.

14 10 Korea's Strategy for Development of STI Capacity : A Historical Perspective within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies (Metcalfe 1995). As defined above, the theory of national innovation system in general discusses the interaction of innovation units and flows of knowledge in the given system, i.e., dealing with dynamism within the system. (Lundvall, 1992; OECD, 1997, 2002 & 2005). It may be taken for granted that such a theory should be developed by looking the national innovation system of the advanced country. Historically, it has taken hundreds of year in the advanced country to build STI capacity of the innovation units, such as firms, universities and research institutes, and therefore the concern must be placed on the efficiency of the national innovation system (see [Figure 1]). It appears that the critical point of the theory of national innovation system lies in that the capacity of the innovation units is given. Their capacity is already built at the advanced level and the theory does not assume that the level of capacity changes over time. Then, what is more important is to investigate the interaction and the knowledge flow between the innovation units. It could be argued that the conceptual framework of the national innovation system should include the process of building capacity of the innovation unit too. Knowledge or resources are available in advanced countries, while not always in developing countries. It would be worthwhile to take account of the national innovation system as continuity from the start of capacity building of innovation units. Thus, there will be a developed, developing and/or underdeveloped system. STI capacity will be in question whether it is fully developed (or degraded after fully developed). Thus, we might take account of the STI capacity as a variable built in the national innovation system. Such a view could expand the policy domain of the government; particularly the governments of the developing countries. Suppose that the potential or efficiency of national innovation system at a given time, S(t), depends on STI capacity of and interaction between innovation units, and other variables. Then, we can write (1),,,,,,,,, where F(t) denotes firm s capacity; R(t) capacity of research institute; U(t) capacity of universities; E(t) STI environment; G(t) government policy. In Eq(1), the cross terms

15 Chapter 2. Evolution of Korean Innovation System 11 represent interaction or knowledge flows between innovation units. In the above equation, if STI capacity of innovation units increases, then the potential or efficiency of national innovation system will be increased. Greater interaction and knowledge flows between innovation units would also increase the potential or efficiency of the system, S(t). Interaction of the units would be made through competition, transactions of goods, services and knowledge, and networking, while knowledge flows through interaction between firms and knowledge-creating institutions, interaction and interdependence between markets, and interaction between market and non-market mechanism (OECD, 2002). Now, STI capacity of innovation units can be written as follows. (2),,,,,,,,, (3),,,,,,,,, (4),,,,,,,,, where K(t) denotes R&D stocks at a given time; P(t) R&D manpower; Y(t) output of manufacturing industry; SM(t) industrial structure; and others are the same as before. STI capacity of innovation units therefore depends on primarily R&D stocks and manpower; capacity of other units, STI environment, and government policy, etc. It can be said that greater R&D stocks and manpower will increase STI capacity of the unit. Since capacity of innovation units is inter-related, the capacity of the unit will be also increased if capacity of other units is greater. That is, the research institutions like GRIs and universities increase their R&D activities, then, the firm will perceive that technological environment is improved and hence increase R&D investment, which results in greater capacity. According to the system, Eq(1)~Eq(4), the government can directly or indirectly influence STI capacity of innovation units through manipulation of the policy variable, G(t), on R&D investment, manpower, and other. Once STI capacity is increased, the potential or efficiency of innovation system will be directly increased. On the other hand, if STI capacity is increased, interaction between units will be increased, and in turn it increases the potential or efficiency of the system. Taking an example from Korean experience, we may review the innovation system from the birth. Korea has built up STI capacity by creating GRI system at the start as shown in

16 12 Korea's Strategy for Development of STI Capacity : A Historical Perspective [Figure 1] STI Capacity Building STI Capacity Building of advanced country STI Capacity Building in Korea Rennaissance Industrial Revolution Industry Scientific Knowledge University SRC/ERC(1990s) Samsung(1983년 ) Hyundai Motors(1974) POSCO (1973) Hyundai Heavy Industry(1972) University Autos Steel Semiconductor Shipbuilding Industry Ancient Greece KIST (1966) GRIs Figure 1. Then, in the course of industrialization, private enterprises built their own technological capacity. For example, Hyundai heavy industry established a shipyard in 1972 in Ulsan area. POSCO, the steel company, completed the first stage of construction of the plants in Hyundai Motors launched the first model of the passenger car in 1974 and developed its own car engine in 1980s. Samsung developed and produced chips for watches and transistor in Later, Samsung developed the memory chips in 1980s in cooperation with GRI. Those innovations took a lead in building STI capacity of the private enterprises in Korea. Finally, by the government support policies, universities began to build R&D capacity in 1990s. [Figure 2] Dynamic Structure of Korean Innovation System 5) Dynamic Structure of KIS 1960s~70s 1980s~90s 2000s~Now Univ Gov t Firm Gov t Gov t Univ Firm Firm GRIs GRIs Univ GRIs Note: 1. Redrawn from Bell (2011). 2. The triangles in the figure represent the innovation triangle. For the convenience, we divide the time period into three periods over the historical evolution of Korean innovation system. 5) The triangle in the figure denotes the innovation triangle.

17 Chapter 2. Evolution of Korean Innovation System 13 As shown in Figure 2, the dynamic structure of the Korean innovation system is exhibited from the start of building STI capacity of the innovation units, and to a firmcentered innovation system. Main feature is that an advanced innovation system has been developed after spending about 40 years to build STI capacity. In the process of system development, two factors played a critical role, that is, industrialization on the demand-pull side and S&T development on the science-push side. It can be pointed out that such STI capacity was initiated and developed by and large by the government. More detail can be discussed in the following Dynamic Structure of Korean Innovation System In viewing the development of the Korean innovation system, for the convenience, we might divide the time period into three stages; the incubation stage (1962~1979), expansion stage (1980~1999), and mature stage (2000~present). 6) Development of Korean innovation system in each stage will be discussed in the follow Incubation Stage (1962~1979) After the Korean War (1950~1953), the Korean economy was only sustained by the foreign aid. However, a new government was established in 1961, and pursued the economic development. In 1962, the Korean government implemented the first 5-year economic development plan which continued up to the 7 th plan in mid 1990s. Based on the economic development plan, Korea pursued outward-oriented industrialization strategy. Korea s industrialization policy focused on fostering the import substitution industry, rather than depending on FDI for industrial development. Export-drive policy was pursued to obtain the investment resources for development and promotion of import substitution industry. Such industrialization strategy had been pursued based on light industry at the early stage. Korean government had taken account of a separate plan to solve the technological problems required for industrialization, while implementing the economic development plan. Such consideration resulted in the establishment of KIST, which is the first GRI in the area of science and technology. Later KIST spun off into various specialty GRIs. 6) According to major changes of the economy, we may divide the time period into the initial stage from 1962 to 1980 in which there was a coup to change the government, the expansion and deepening stage from 1981 to 1997 in which the foreign exchange crises hit the Korean economy, and S&T-based innovation stage from 1998 to the present.

18 14 Korea's Strategy for Development of STI Capacity : A Historical Perspective Subsequent establishment of government institutes formed a unique GRI system. The GRI system expanded in 1970s as the government pursued development of heavy chemical industry. GRIs intended to cope with pending technological needs of the industry and had constructed the platform of R&D in Korea. [Figure 3] Incubation Stage (1962~1979) Turnkey-based technology transfer in 1960s and reverse engineering based technology acquisition and assimilation in 1970s Plant operation technologies Machinery embedded technologies Foreign knowledge sources KIST (1966) GRIs Specialty GRIs (1970s) Industries Promotion of labor-intensive export industries in 1960s Development of strategic heavy and chemical industries in 1970s Contract researches for technology exploration Contract researches for technology acquisition and assimilation Government Note: 1. The triangle in the figure represents the innovation triangle. The government began to create the industrial complex with the first 5-year economic development plan. The plan was designed to develop the industrial complex for smooth firm activities while the infrastructure was not sufficient elsewhere. The creation of industrial complex was effective for establishing firms and fostering the industry. As an extension of this effort, the government established a plan to construct the research complex for the GRIs, and it became a basis of Korea s GRI system. At the beginning, Korea imported capital goods from advanced countries in which advanced technology was included. Technology transfer was made on turn-key base in 1960s, and some reverse-engineering was a method of acquisition of foreign technology in 1970s. Most domestic enterprises were lacking technological capacity in this time period.

19 Chapter 2. Evolution of Korean Innovation System 15 In 1973, the government declared to pursue the policy for development of heavy chemical industry. The government selected six strategic industries such as steel, electronics, chemicals, machinery, ship-building and non-ferrous metal. Since these heavy chemical industries could not be developed without technological capacity, the government also decided to expand the GRI system to establish more GRIs. By the end of 1970s, 19 GRIs had been established, and they were ready to undertake research, if funded. As the government offered a privileged compensation, it was possible for the GRIs to recruit the qualified Korean scientists and engineers from the advanced countries. The government creation of the GRIs was the first step to building the R&D capacity. To build up R&D capacity of GRIs instead of universities was an important decision for the government. 7) Since GRIs were directly under the control of the government, it was easier to build research institutions, to recruit qualified scientists, and deploy GRIs strategically. Later, such a choice proved to be an effective way to build R&D capacity from the bottom in a relatively shorter time period. As the GRIs grew, enterprises and then universities also started to build R&D capacity in time. Thus, the government initiative in 1960s was critical to setting up the platform of STI capacity in Korea. Briefly, Korean innovation system started to be built on the barren ground in this period. However, the establishment of KIST was a seed to build R&D capacity and later developed the unique GRI system. Such R&D capacity was increasingly developed as increase and expansion of industrial needs for science and technology. In this time period, however, technological capacity of private enterprises was relatively at the lower level, focusing development of labor-intensive industry. Finally, universities had almost no research capacity at this time. Therefore, government policy focused on industrialization and build-up of R&D capacity, and it was too early to pay attention to innovation policy for increasing dynamism between innovation units in Korean innovation system. 7) Universities in 1960s and 1970s had nothing but teaching facilities; it was made of only teachers and buildings for classrooms. There was no R&D facility in universities. If the government decided to build R&D capacity in universities, it would have had to work with many university professors, which would bring significant cost for organization and coordination in line with the government policies for economic development.

20 16 Korea's Strategy for Development of STI Capacity : A Historical Perspective Expansion Stage (1980~1999) There was a political change in 1980 led to the establishment of a new government. Pursuing the development of heavy chemical industries, Korea made a sizable investment in strategic areas in the end of 1970s. The Korean economy was also hit by the second oil shock in With the political turmoil in 1980, unfriendly economic environment and burdensome investment in heavy chemical industry, the Korean economy recorded a negative rate of growth in After the new government was established, the economic stabilization policy was pursued and implemented strongly, which resulted in not only a structural reform in industries, but also in the GRI system. Technology protectionism [Figure 4] Expansion Stage (1980~1999) Foreign enabling technologies Enterprise Research Institutes Dramatic increases since 1980s Technology indigenization Assemblers Increase of industrial R&D investment GRIs Restructuring in 1980s Universities GRIs Expansion in 1990s Development Of complex technologies Substitution Of imported parts Creation of technology industries in 1980s and new industries in 1990s Public research system Suppliers Government Various R&D programs In 1980s, technology protectionism prevailed extensively and technology transfer from the advanced countries was not as smooth as in 1960s and 1970s 8). As more investment was made in the area of the heavy chemical industry, Korea needed to acquire foreign enabling technologies from advanced countries. The private enterprise had the absorption capacity to some degree by establishing its own research institute. Therefore, GRIs played a role as a middleman in transferring foreign enabling technology to the domes- 8) In 1980s, Japanese auto-industry emerged particularly in the US market. Competitiveness of the US industry was seriously threatened by Japanese industry among others.

21 Chapter 2. Evolution of Korean Innovation System 17 tic enterprises whose research institute was in contact with GRIs. On the other hand, the corporate research institute continued to build up its own R&D capacity; for example, Samsung for semi-conductor, and Hyundai Motors for car engine in 1980s. After the reform of the GRI system in early 1980s, the government started to undertake the national R&D programs in 1982 by funding GRIs. Major R&D projects were launched by GRIs in 1980s and 1990s. On the other hand, the private sector made a major movement to build R&D capacity by establishing corporate research institutes. Since major enterprises (becoming Chaebols later) made investment in the area of heavy chemical industry, the private enterprises needed to secure their own technological capacity. The private enterprises took the R&D initiative in 1982 at the national level, showing greater R&D investment over the public ever since. In the second half of 1980s, economic environment turned in favor of Korea, and the heavy chemical industries of Korea boomed with so-called three lows, i.e., lower rate of inflation and interest rate, and favorable exchange rates to promote export. Korea also moved out of the status of a chronic debtor country in late 1980s, and consolidated the industrial platform. In 1980s, Korean innovation system expanded in the sense of R&D capacity of innovation units as industrialization was well in progress, and expansion of industrial needs for science and technology also made the GRI system grow, and then R&D capacity of universities had built up significantly in late 1990s. Although the innovation units were not in full capacity in this time period, Korean innovation system revealed its own shape, with more interactions of innovation units being observed, which allowed the government to implement various innovation policies since late 1990s Mature Stage (since 2000) As Korean innovation system was being developed by growing STI capacity of the innovation units, the strategic relationship was formed increasingly between the innovation units. Perspective of the government policy changed from catching-up to creative innovation. As Korea has been moving into the knowledge-based economy, the government increased R&D investment substantially in the public. The government particularly emphasized identification of technologies for the next generation growth engines, and large-scale R&D projects were formulated through various foresight activities. 9) 9) For example, Korean Delphi is undertaken in every 5 years since 1994, and NTRMs (national technology roadmaps) in 2002.

22 18 Korea's Strategy for Development of STI Capacity : A Historical Perspective In the industrial sector, the private enterprise focused on developing source technologies. The private enterprises achieved a remarkable performance in the world market, but mostly they depended by and large on foreign source technology in producing their products. To secure and maintain competitiveness, the private enterprises and the government recognized it necessary to develop own source technology. Such a need led the government policy to foster and strengthen the strategic relationship between the innovation units on the one hand and increase investment in basic research on the other; including support policies for technology start-ups. [Figure 5] Mature Stage (after 2000) Technology protectionism Foreign fundamental technologies Enterprises (Research Institutes) Assemblers Technological uncertainties Suppliers GRIs Strategic partnership Technology spin-offs Universities Public research system Preparing future industry Government Increase of government R&D with greater focus on basic research Public needs of quality of life, Sustainable development, etc. Meanwhile, IT industry created a number of business opportunities, for which technology start-ups boomed since the end of 1990s. After the boom of technology start-ups, several venture companies grew rapidly to large-scale business. This stimulate the young entrepreneurs, and technology start-ups constantly rose and fell, spun off from GRIs, universities and large-scale enterprises. It would be said that Korean innovation system exhibited a complete feature of triple helix in about 40 years after the economic development started in As moved into the 21 st century, the government increased R&D investment significantly in the public sector and pursued various innovation policies to increase interaction and knowledge flows between enterprises, universities, and GRIs. Based on improved R&D capacity of

23 Chapter 2. Evolution of Korean Innovation System 19 GRIs and universities, the government pursued large-scale R&D projects such New Growth Engines Project, and Global Frontier Projects, etc. One major characteristics of Korean innovation system is that the government still stands on a strong position in support of S&T-based innovation, while it is dominated by the private sector. The government has the control of the GRI system, and makes use of it strategically in pursuing large-scale projects. In summary, Korean innovation system has been developed for only about 4 decades from build-up of STI capacity. In the course of the development, the government made S&T platform by creating and building R&D capacity of GRIs in 1960s and 1970s, and private enterprises followed to build R&D capacity. In 1990s, finally the government policy focused on building R&D capacity of universities. On the other hand, industrialization was initiated and driven by the government, and changed the industry to technology-intensive structure. Fast industrialization rapidly increasing needs for STI. Meanwhile, GRI system produced major outcomes underpin to some degree existing and emerging in Korea. As national innovation system was being developed, the interaction and flows of knowledge between the innovation units became increasingly important, on which the government policy started to focus and to implement various innovation policies by the government. In addition, the government policy today places an emphasis on increase in efficiency of R&D investment and improvement of governance to raise transparency of resource allocation in the public sector. In this line, the government pursued both restructuring the GRI system for increasing the investment in basic research. In developing national innovation system, double-winged strategy had been implemented by the government, that is, promotion of industrialization and S&T development by creation of GRI system. Without S&T development, industrialization would not be possible, vice versa.

24 20 Korea's Strategy for Development of STI Capacity : A Historical Perspective Chapter 3 Industrial Policy and Changes of Industrial Structure 3.1. Changes of Industrial Structure When the Korean government pursued the economic development policy, Korea s GDP was about 27,912 billion won in 1961 (prices of 2005), which increased to about 1,042 trillion won in 2010; approximately about 37 times in real term as much as GDP in On the other hand, GNI per capita was increased from 82 dollars (current prices) to 20,759 dollars over the same period, which is about 253 times in nominal term as big as that in Such growth of GDP was possible due to fast industrialization over the time period driven by pursuing outward-looking strategy. Over the period of 1961~2010, the industry has been changed from the agriculturebased structure to knowledge-intensive one. In 1961, the agriculture and manufacturing sector accounted for about 39.1 per cent and 15.5 per cent of GDP, respectively. In 2010, the manufacturing sector accounted for about 27.7 per cent of GDP, and the agricultural sector for about 2.3 per cent. On the other hand, the export was increased from about 15.7 billion won about 614 trillion won in 2010 (current prices). Over the same period, the ratio of export to GDP increased from 5.4 per cent 52.4 per cent. In order to look into the industrial structure in consideration of technological innovation, we may classify the products into simple product/process and complex product/process. (Rycroft & Kash, 2000). In this classification, 10) it is obvious that complex in both product and process includes more technological components, i.e., technological innovation. By such a classification, the structures of world top 30 export products in 1975 and 1995 are compared. Then, it can be found that the share of simple product-simple process had decreased, substantially, while that of complex product-complex process had increased. It implies that the international tradable had shifted to the goods which 10) Products/processes are classified as complex, if they cannot be understood in full detail by an individual expert sufficiently to communicate all the details of them across time and distance to other experts. They are considered as simple, if they can be understood and communicated by an individual expert. Assessment of products/processes are made by a group of experts. See Rycroft & Kash (2000).

25 Chapter 3. Industrial Policy and Changes of Industrial Structure 21 contains more S&T-based innovation; and hence to the technology (or knowledge) intensive industrial structure GDP (billion won) 27,912 28,509 31,259 34,225 36,169 40,518 43,117 48,064 54,722 61,669 68,690 73,122 83,318 91,226 97, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,601 1,042,492 <Table 1> Major Economic indicators GDP by Industry (%) Agriculture Manufacturing Service Note: GDP is in prices of 2005; and others in current prices. Source: Bank of Korea, National Accounts Export-GDP Ratios (%) GNI per capita (US dollars) ,043 1,443 1,693 1,660 1,826 1,927 2,113 2,300 2,355 2,702 3,402 4,548 5,556 6,303 7,276 7,714 8,402 9,727 11,735 12,518 11,505 7,607 9,778 11,292 10,631 12,100 13,460 15,082 17,531 19,722 21,695 19,296 17,193 20,759

26 22 Korea's Strategy for Development of STI Capacity : A Historical Perspective [Figure 6] World top 30 Exports in 1975 Simple PRODUCT Complex P R O C E S S meat fresh, chiilled, frozen Wheat Maize Sugar & honey Coal Crude petroleum Petroleum products Paper & paperboard Textile yarn & thread Woven textiiles noncotton Iron & steel shapes Iron, steel univ., plate, sheet Iron, steel tubes, pipes Clothing not of fur Organic chemicals Medicinal, etc., products Plastic materials Chemicals, NES Electrical machinery NES Power machinery, non-electric Agricultural machinery Office machines Machines for special industries Electrical power machinery Telecom equipment Electrical machinery NES Troad motor vehicles Aircraft Ships & boats Instruments, apparatus Complex Source: Rycroft & Kash (2000) [Figure 7] World top 30 Exports in 1995 Simple PRODUCT Complex P R O C E S S Meat fresh, chilled, frozen crude petroleum Pearl Aluminium Base metal Furniture Women's outwear non knit Footwear Toys, sporting goods Petroleum products refined Medicinal, tec., products Polymerization products Paper & paerboard Iron, steel univ., palte, sheet Heating, cooling equip. Non-electrical machine parts Articles of palastic NES Passenger motor vehicles excl. buses Trnasisters, valves, etc. Automatic data processing equip. Motor vehicle parts, acces. Telecom equipments, parts, acces. Office, adp. Machine parts, acces. Electrical machinery Aircraft Switchgear, etc., parts Other machinery for special industries Internation combustion piston engine Measuring, controlling equip. Lorries, special motor vehicles Complex Source: op. cit.

27 Chapter 3. Industrial Policy and Changes of Industrial Structure 23 [Figure 8] Korea s Top 30 Exports in 1975 and Complex/simple Complex/simple 25.8 Simple/simple Complex/complex 26.9 Simple/simple Complex/complex 85.2 Source: T. Shin (2003) Over the same period, Korea s top 30 export products were investigated. The export share of simple/simple was 26.9%, while the export share of complex/simple was 47.3%, and the export share of complex/complex was 25.8% in On the other hand, while the export share of simple/simple had changed to 6.8%. The export share of complex/simple had changed to 8.0%. The export share of complex/complex had increased to 85.2% in Industrial Policy and Industrialization In the background of such a successful industrialization, the role of the Korean government was very important. It is thus worthwhile to make a remark about the industrial policy pursued by the Korean government. Over the last four decades, the industrial policy includes mainly (i) industrial development, (ii) constructing industrial complex, (iii) industrial technology development, and (iv) fostering technology start-ups. In 1962, the government made and implemented the first 5-year economic development plan. When the government pursued economic development, it appeared that the leaders of the government had such a vision that Korea should be one of advanced industrialized countries in the future. Therefore, they already considered development of heavy chemical industry. However, due to deficiency of investment fund, industrial development started with development of the light industries, by which the foreign exchange

28 24 Korea's Strategy for Development of STI Capacity : A Historical Perspective could be earned for investment in heavy chemical industry. In the early 1960s, therefore, the priority was given to the increase in exports to secure the foreign exchange. At the beginning, the government focused on development industries such as fertilizer, cement, plywood and textile. Various export-promotion policies were implemented such as export grant issue (September 18, 1961), export performance link system (January 5, 1963), export promotion measures (June 24, 1964), export promotion fund operation system (September 16, 1964). In 1970s, the government pursued industrial policies focusing on development of heavy chemical industry to create the key industrial foundation of national economy. The Korean government started to make ambitious investment in the heavy industrial sector. 11) Such export-drive policy intentionally made resource allocation in favor of a few entrepreneurial families, who grew to Chaebols later on. As export grew rapidly in 1960s, the Korean government actively engaged in investing and developing heavy chemical industry. Such a policy was spurred by the successful completion of the first stage of POSCO, the steel plant. The long-term plan for development of heavy chemical industry, including six key industries such as steel, nonferrous metal, automotive, machinery, ship-building, electronics and chemicals was made. Such the long-term plan played an important role to finance the investment. The technical aids of UN had changed from fragmented aids to technical cooperation according to the long-term development plan, enabling large scale investment. In 1980s, the government recognized the limit of economic growth through catch-up strategy during 1960s 1970s, and competitiveness and advancement of industrial structure through reinforcement of technological innovation were required. However, large-scale investment in heavy chemical industry area in 1970s began to cause aftermath. In particular, as the large-scale production facilities and equipments were introduced and installed without proper plans, sufficient opportunities were not accumulated for utilization and acquisition of technology. Thus, rationalization plan of industry in 1981 was pursued, and serious adjustment of industries was enforced strongly by the authoritarian government. Nonetheless the economic difficulties of the first half of the 1980s, the government was able to manage the inflation rate with stability. In the second half of the decade, the world economy was in a boom with three low s, and it gave an opportunity for the heavy chemical industry in Korea to make a strong foundation. 11) The government plan for the development of heavy chemical industry was not accredited by the foreign experts and investors at that time, but eventually approved.

29 Chapter 3. Industrial Policy and Changes of Industrial Structure 25 With the end of the Cold War in early 1990, economic and technological competitiveness became more important, relative to the military power. A trend was observed that the industry had increasingly changed to knowledge-intensive structure in advanced countries. Technology protectionism became strengthened, since technology is considered as a key factor to determine the industrial competitiveness. Accordingly, the Korean government adopted the technology-drive policy and fostered S&T-based innovation. On the other hand, the government had constructed the industrial complex continuously throughout the country for the efficient use of land. It was effective to develop industry because industrial infrastructure was not sufficient elsewhere. Some of the industrial complex had grown as a competitive cluster in the world market. For example, there are Ulsan cluster for automotive and ship-building industries; Changwon cluster for machinery industry, and Suwon cluster for semi-conductor industry, etc. The government also pursued actively policies for the industrial technology development since 1990, by implementing technology foresight and making long-term plans. Such a policy was undertaken by the Ministry of Industry. Technology is recognized as policy area by the plural ministries of the government since then. In the end of 1990s, as the STI capacity of the innovation units such as firms, GRIs and universities grew and business environment improved for the technology start-ups on the other, the government implemented strong policy to foster the technology start-ups, in order to put the economy back on the track after the foreign exchange crisis in Many technology start-ups made successes and in time became large-scale enterprises; particularly in the IT area. Indeed, the IT revolution in 1990s had brought a window of opportunity to Korea, and the Korean economy was able to jump to a higher dimension, through heavy investment in the IT area. All in all, Korea has risen to an advanced economy through industrialization only over last four decades. There must be many factors to influence the course of such industrialization; such as, for example, entrepreneurship, political leadership, human resources, and S&T capacity, among others. It is true that industrialization increased and expanded needs for science and technology. Without S&T development, industrialization would be constrained by technology transfer from advanced country, since technology protectionism expanded and deepened over time.

30 26 Korea's Strategy for Development of STI Capacity : A Historical Perspective Chapter 4 S&T Policy and Advancement of National Innovation System 4.1. Trends of R&D Investment and HRST R&D investment 12) was billion won in 1970 at the constant price. Over the period of 1970~2010, R&D investment increased 13.7% on annual average, and reached 38,982.0 billion won ) This increase rate far exceeded the annual growth rate of GDP, 7.3% over the same period. R&D activity in Korea appeared to be undertaken firstly in the public sector when the first 5-year economic development plan started in At the early stage of the economic development, the Korean government pursued the development of light industry for import substitution. Accordingly, R&D in this period focused on the adaptation and improvement of imported (production) technology and securing the required manpower. In table 2, the share of R&D investment of the government accounted for 70.3 per cent out of total R&D investment, while that of the private sector for 29.7 per cent. It implies that the R&D activity in Korea was initiated and led by the government at the early stage of economic development. It can be said that the government made R&D platform in 1960s and 1970s by establishing GRI system. The government also started to launch national R&D program since However, the government share continued to fall down, and in 1982 the share of the private sector exceeded that of the government. Due to the investment in heavy chemical industry in late 1970s, the private enterprises began to build up technological capacity by making investment in R&D. The rapid growth of heavy chemical industries in the second half of 1980s changed the industrial structure to technology-intensive structure. It increased explosively needs for and investment in R&D. The government had provided various support policy for R&D in the private sector. 12) Korea R&D investment was determined with the first 5-year economic development plan. While R&D investment statistics from 1963 appeared in existing data, it was not that systematic survey like the present one. It was in the middle of 1980s when R&D index were developed according to Frascati Manual of OECD, which allowed international comparison. 13) R&D investment in Table 3 is shown at the current prices.

31 Chapter 4. S&T Policy and Advancement of National Innovation System GERD (billion won) , , , , , , , , , , , , , , , , , , , , , , , , , ,854.8 <Table 2> Major R&D Indicators R&D Exp. By Sources (%) Government Private Government R&D Budget (billion won) , , , , , , , , , , , , , , , , , ,959,6 Note: GERD denotes gross expenditure in R&D; and R&D expenditures are in current prices. Researchers (FTE, person) 5,628 5,320 5,599 6,065 6,314 10,275 11,661 12,771 14,749 15,711 18,434 20,718 28,448 32,117 37,103 41,473 47,042 52,783 56,545 66,220 70,503 73,275 85,268 93,680 89, ,456 99, ,660 92, , , , , , , , , , , , ,118 In 1990s, Korea firstly introduced S&T foresight activity to produce strategic information about science and technology. S&T foresight activity quickly disseminated over various sectors. S&T foresight made it possible to formulate the strategic R&D programs in a large scale. On the other hand, the private sector and government observed the paradigm shift in technological innovation started from the IT area. Such recognition of both the government and private sector increased R&D investment, particularly